Problem 6-9 (Algo) Short-term versus longer-term borrowing [LO6-3] Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $270,000. The company can borrow $270,000 for three years at 13 percent annual Interest or for one year at 11 percent annual Interest. Assume Interest is paid in full at the end of each year. a. How much would Sauer Food Company save in Interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 11 percent rate? Compare this to the 13 percent three-year loan. 11 percent loan 13 percent loan Interest savings Interest b. What if Interest rates on the 11 percent loan go up to 16 percent in year 2 and 19 percent in year 3? What would be the total Interest cost compared to the 13 percent, three-year loan? Fixed-rate 13% loan Variable-rate loan Additional interest cost Interest

Problem 6-9 (Algo) Short-term versus longer-term borrowing [LO6-3] Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $270,000. The company can borrow $270,000 for three years at 13 percent annual Interest or for one year at 11 percent annual Interest. Assume Interest is paid in full at the end of each year. a. How much would Sauer Food Company save in Interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 11 percent rate? Compare this to the 13 percent three-year loan. 11 percent loan 13 percent loan Interest savings Interest b. What if Interest rates on the 11 percent loan go up to 16 percent in year 2 and 19 percent in year 3? What would be the total Interest cost compared to the 13 percent, three-year loan? Fixed-rate 13% loan Variable-rate loan Additional interest cost Interest

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 14P

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Problem 8-33 Equivalent Annual Annuity (LO5) A firm can lease a truck for 4 years at a cost of $47,000 annually. It can instead buy a truck at a cost of $97,000, with annual maintenance expenses of $27,000. The truck will be sold at the end of 4 years for $37.000. a. What is the equivalent annual cost of buying and maintaining the truck if the discount rate is 10% ? (Do not round intermedi calculations. Round your answer to 2 decimal places.) Equivalent annual cost
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Cost of Bank Loan Mary Jones recently obtained an equipment loan from a local bank. The loan is for 15,000 with a nominal interest rate of 11%. However, this is an installment loan, so the bank also charges add-on interest. Mary must make monthly payments on the loan, and the loan is to be repaid in 1 year. What is the effective annual rate on the loan (assuming a 365-day year)?
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